Supply Chain Management: An International Journal

Product range management: a case study of supply chain operations in the European grocery industry
Jan Holmström
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Jan Holmström, (1997),"Product range management: a case study of supply chain operations in the European grocery
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Alexander H. Hübner, Heinrich Kuhn, Michael G. Sternbeck, (2013),"Demand and supply chain planning in grocery retail: an
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Case study
Product range
management: a case
study of supply chain
operations in the
European grocery
industry
Jan Holmström
The author
Jan Holmström is based at the Department of Industrial
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Management, Helsinki University of Technology, Sweden.
Abstract
A particular problem for European suppliers to the grocery
trade is the requirement for country or region specific
product variants. A large number of local variants dramati-
cally reduces the supply chain performance of a European
supplier in the smaller markets. Focuses on the issue of
product range management in European supply chain
operations and its role in achieving efficient consumer
response in the many regional markets within the EU.
Discusses the importance for supply chain management of
well-defined roles for the product range in different
markets and for different customers. Assesses the supply
chain performance of a European supplier from the
perspective of a regional market. Presents some alterna-
tive tactics for achieving the strategic goal of continuous
supply in small regional markets.
Supply Chain Management
Volume 2 · Number 3 · 1997 · pp. 107–115
© MCB University Press · ISSN 1359-8546
107
Introduction
At the heart of many consumer packaged
goods companies is the brand management
system, which has also been a role model for
other industries. Recently, the picture has
changed. New retail formats, private label and
generic products and market changes have
undermined profit and raised doubts about
the supplier organization (Armstrong et al.,
1996).
The industry’s answer is to improve its
operating efficiency and service (Pontin et al.,
1995). This effort is known as Efficient Con-
sumer Response (Robins, 1994; Yohalem,
1995). The goal is to eliminate waste and
increase service by building up a demand-
driven supply chain. The focus of both suppli-
ers and retail chains is to improve profitability
and market share by responding better and
quicker to consumer demand.
In the retail trade, the roles of product
brands and product line extensions are dimin-
ishing and the importance of strategic product
categories is increasing (Quelch and Kenny,
1994). The essence of this shift in focus is the
alignment of service with consumer needs. An
important part of this is the critical examina-
tion of the role of each product variant from a
consumer perspective. However, European
suppliers have found it difficult to change
their supply chain operations adequately to
meet the new challenges of a stronger con-
sumer focus in the retail trade.
This article discusses the problems
encountered by a European multinational
supplier that in recent years has both consoli-
dated production to fewer sites and expanded
into new markets. The case company is a
supplier of household products to the grocery
trade. The study attempts to show why Euro-
pean suppliers have difficulties in efficiently
serving small markets at the same time as
servicing the major retail customers.
Poor supply chain performance in
Europe – the result of bad product range
management?
The actors in the packaged goods industry are
the supplier, the marketer, the distributor, the
wholesaler, the retailer and the consumer.
The case company acts in the operational
roles of supplier and marketer. In this sce-
nario, the suppliers provide the products for
the European market and the marketers
 Product range management Supply Chain Management
Jan Holmström Volume 2 · Number 3 · 1997 · 107–115

promote brands locally and sell to whole-
salers, who in turn distribute to retailers.
Before the integration of the European
market in the early 1990s, supply and distrib-
ution were essentially conducted at a local
level. However, through a process of special-
ization in supply, the regional supply chain
structure has been extended to cover a num-
ber of regional markets. The consequence of
this development is a supply chain with
diverging flows in each supply chain echelon
(Figure 1). With a supply chain structure of
this kind, service and efficiency can be kept at
satisfactory levels in the large and central
regions of the European market, but severe
problems are encountered in the smaller
markets.
A particular problem for the supply chain
in this case study is the requirement for coun-
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category of products and/or services which
the consumer perceives as interdependent or
as substitutes. The objective is to maximize
consumer value in the category. Product
range management is the extension of catego-
ry management upstream in the supply chain.
The goal is to organize the supply chain in
response to consumer requirements as identi-
fied in category and sub-category roles.
Category management takes the viewpoint
of the retailer. The objective is to create dis-
tinct manageable groups of products that
consumers perceive to be inter-related or
substitutable and to define the strategic role of
the category in the retail echelon (ECR Best
Practices Operating Committee, 1995).
Typical strategic roles for categories are:
• destination;
• routine;

try or region specific product variants, which • seasonal; and

dramatically increases transaction volumes. • convenience.
Due to regional differences (e.g. language and
taste) the goods cannot always be the same A destination category aims at being the
throughout Europe. Instead of supplying one primary provider of the products to the target
product to the European market, the supplier consumer through consistent superior value.
is expected to provide a number of countries A destination category is very important from
and regions with their unique product variant, the consumers’ point of view (e.g. nappies for
resulting, in many instances, in an increase in families with babies). Categories that estab-
the number of product variants by a factor of lish the retail chain as the store of choice by
ten. providing consistent, competitive value in
meeting consumers’ routine stock-up needs
Product range management – linking are routine categories. Seasonal categories
supply with demand also contribute to the “choice” element,
The starting point for a demand-driven sup- providing consumers with products which
ply chain is the consumer (Armstrong et al., consumers expect at particular times of the
1996). In the retail echelon, consumer needs year (such as certain types of fruit and vegeta-
are met by the systematic management of a bles). Competition in these categories is
primarily from specialist retail outlets (e.g.
greengrocers, butchers). Finally, categories
Figure 1 A complex “many-to-many” supply chain structure that reinforce the retailer’s image as a full
service store by providing for the target con-
Supplier Retail
Retail sumers’ unplanned “fill-in” needs are conve-
Chain Retail nience categories, which have a strategic role.
Supplier Retail
The definition and function of a category is
Chain Retail
Retail common to the retailer, the marketer and the
Retail
Marketer Chain supplier. Based on this definition, the mar-
Retail
Retail keter and supplier can start aligning their
Supplier
Retail supply chain operations to maximize con-
Retail sumer value in the retail echelon. The corner-
Marketer Chain Retail stone of this alignment is product range man-
Supplier Retail
Chain Retail agement – controlling supply of the items in
Retail the product range according to the impor-
Retail
Chain Retail tance of their respective categories at the retail
Supplier Retail level. For example, in a destination category, a
high level of supply service is needed for a
wide product range. On the other hand, in a
108
 Product range management
Jan Holmström
convenience category, stock-outs for individ-
ual items are less critical.
For a supplier, it is important to correctly
determine how the individual product items
in its product range respond to consumer
needs. Each product item of a category has a
distinct role to play. To get a better under-
standing of what roles its products play at the
retail level, the supplier in this case study
conducted a survey of 45 shops in a small
market. The objective was to determine, in
terms of shelf space, sales and inventory
turnover, how different products within the
product range were performing. The products
were chosen from a particular category of
household items – the key category of the
supplier but a routine category for most con-
sumers and retailers.
The results of the study are presented in
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Figure 2, within the framework of traffic-
building, profit-generating and image-
enhancing roles. A traffic builder is a product
that draws consumer traffic into the aisle in
the store. The profit generator is a sub-catego-
ry or product that increases category gross
profit. The image enhancer is a sub-category
or item that reinforces the retailer’s desired
image to the consumer. Figure 2 shows the
performance of the product range in terms of
sales and shelf space at the retail level. The
traffic-building items of the range can clearly
be identified by their large shelf space and
high sales. The profit-generating items are
distinguished by a good inventory turnover in
the stores. The image-enhancing items have
the most shelf space, in proportion to sales.
In most product categories, a large number
of image-enhancing items do not increase
consumer value. It is only in the destination
categories of the retailer that a wide range of
product offerings brings increased consumer
value. In routine and convenience categories,
Figure 2 The product range of the case supplier in terms of sales and shelf
space in the sample of retail outlets
Image enhancing
Shelf space
Traffic building
Profit generating
Sales
109
Supply Chain Management
Volume 2 · Number 3 · 1997 · 107–115
competition for space drives up costs and
undermines the opportunities for introducing
demand-driven replenishment practices. In
order to use point-of-sales data for replenish-
ment control, a systematic setting of inventory
levels at the retail level is necessary.
The results from the initial study revealed
that the competition for space (i.e. the prac-
tice of selling in large quantities to retailer
customers) already distorts demand at the
retail level. In the traffic-building sub-
category, several shops in the study had
shelves and displays with stock for over 100
days of sales. A follow-up study of 43 retail
outlets produced very similar results. In a
situation with demand distortion already at
the retail level, it is a virtually impossible task
for supply chains to operate efficient replen-
ishment. Only with the co-operation of the
retailer – careful monitoring of sales activities,
pipeline inventory and consumer out-take –
can good supply chain performance be
secured.
The objective of product range manage-
ment is to provide a supply service based on
the role of individual product items in the
stores. In a European supply chain, the ser-
vice a supplier provides a market should not
depend on absolute volume, but on the
importance of the product in its market.
Thus, for example, traffic builders in a small
regional market require more attention than
image-enhancing items in large markets.
Supply service is therefore based on consumer
values, not sales volume.
Figure 3 shows the position of the traffic-
building items from the initial shop survey in
the local sales and marketing organization’s
Figure 3 The position of the traffic-building items in the local sales and
marketing organization’s product range and in the European supplier’s
product range
Cumulative volume (per cent)
100
75
50
Key
25 European supplier
Local sales organization
0
1 51 101 151 201 251 301
Stock keeping units by rank
 Product range management
Jan Holmström
product range and in the European produc-
er’s product range. The products are ordered
by rank, both for the marketer and the pro-
ducer. It is evident that for the European
production unit the key items of the local
marketer are marginal. The challenge then
becomes to ensure that delivery service from
the European supplier to the local market
lives up to the requirements of continuous
replenishment to the trade.
Supply chain assessment
We now look at supply chain performance
from the perspective of the small sales and
marketing organization, in order to under-
stand what problems are encountered in
European markets when appropriate atten-
tion is not paid to product range manage-
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ment.
The marketer sources a range of goods for
its market from half-a-dozen production
facilities all over Europe. The frequency of
delivery of stock-keeping units varies with
sales volume, on a weekly, monthly or quar-
terly basis. The average delivery frequency is
15 times a year with a stock cover of five
weeks. The goods are sold and distributed to
large retailer chains and individual discount
stores.
The main operational problems facing the
marketer are:
• long lead times in sourcing for all items,
irrespective of category role;
• the service level of supplying factories is
equally poor for all items in the product
range; and
Figure 4 Consumer demand, shop orders, orders placed by the retail chains to the vendor, supply requests to the
factories and deliveries from the supplying factories for a traffic-building product in the category
Quantity
Quantity
Consumption
Time
Time
Quantity
Supply
Quantity
Time
Supply Chain Management
Volume 2 · Number 3 · 1997 · 107–115
• high variability of incoming order volume
from retailers.
The long lead time and poor accuracy of
deliveries is aggravated by demand distortion
at the retail level. To secure high service levels,
the marketer needs to buffer both against
supply disruptions and unpredictable retail
orders. This in turn distorts the demand that
the supplying factory perceives.
The key measure for determining how well
demand and supply is synchronized is vari-
ability. High variability increases the risk of
demand distortion. Demand distortion was
first described by Forrester (1961) in his
classic supply chain model, but it is only
recently that the full extent of the problem has
been recognized (Towill, 1996). Figures 4 and
5 illustrate how well synchronized the retail
store, marketer and supplying factory eche-
lons are to consumer demand for one of the
traffic-building and profit-generating prod-
ucts of the shop study discussed. Consumer
demand, shop orders, orders placed by the
retailer to the marketer, supply requests to the
factories and deliveries from the supplying
factories, are shown for both the traffic-build-
ing and profit-generating items.
Table I presents the standard deviation of
weekly demand as a percentage of the average
for the traffic-building and profit-generating
products of the supplier’s range in the exam-
ple category.
For the profit-generating product, the
variability of shop orders is three times greater
than consumer demand, the retail order
Shop orders
Quantity
Chain orders
Time
Supply requests
Time
110
 Product range management Supply Chain Management
Jan Holmström Volume 2 · Number 3 · 1997 · 107–115

Figure 5 Consumer demand, shop orders, orders placed by the retail chains to the vendor, supply requests to the factories
and deliveries from the supplying factories for a profit-generating product in the category

Quantity Shop orders

Quantity Quantity
Chain orders
Consumption

Time
Time Time

Quantity Supply
Quantity Supply requests

Time
Time
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variability ten times greater, and vendor
supply request variability 23 times greater. In
total, the relationship between weekly vari-
ability of supply and demand is 29:1. For the
traffic-building product, the corresponding
values are 3, 8 and 5, and the relationship
between variability of supply and demand is
9:1.
The analysis shows that the supply chain is
badly adapted to provide sufficient service for
key segments of the product range. Consumer
demand is already distorted beyond recogni-
tion in the retail chain echelon because of
trade loading. The other critical problem is
that supply is discontinuous, even for traffic-
building products.
The increase in variability through the
supply chain is partly a result of delays in
information flow and miscalculating changes
in consumer demand. The accumulation or
consumption of buffer stocks affect the order
levels in each echelon, thus further delaying
and distorting the information on changes in
demand (Fincke and Goffard, 1993). This
effect is dominant for the traffic-building
products in the range of the supply chain in
this case study.
It is evident from Figures 4 and 5 that the
European production unit does not continu-
ously supply the local sales organization.
Reducing production and delivery frequency
for small volume items at the European sup-
plier level is, in effect, a reduction in the
service level provided to small markets. The
result is that it becomes much more difficult
to achieve a fast and reliable response to
consumers in these markets. The marketing
and sales organization cannot achieve the
levels of cost efficiency and service required to
develop a close partnership with wholesalers
and retail chains. Since small markets togeth-
er constitute a large portion of the total Euro-
pean market, the supply chain also has to cope
with high levels of demand uncertainty.

Table I Weekly variability from average in each supply chain echelon of the traffic-building and profit-generating prod-
ucts of the supplier’s range in the example category

Variability for Variability for

traffic-building profit-generating
Supply chain echelon product (%) product (%)
Consumer out-take at retail outlet 10 7
Shop orders 26 22
Retail chain orders to local sales organization 75 67
Local sales organization’s requests to European
factory 54 160
Supply from European factory 90 200

111
 Product range management Supply Chain Management
Jan Holmström Volume 2 · Number 3 · 1997 · 107–115

Supply chain strategy – continuous Supplying factory to marketer

supply for destination and routine
categories
The goal of efficient consumer response in the
packaged goods industry is to develop a
responsive, consumer-driven system in which
suppliers, marketers and wholesalers work
together to maximize consumer value and
minimize the supply chain cost (Cahill,
1995). To achieve that in a complex European
supply chain operation requires decisive
changes in the way all supply chain partici-
pants act and co-operate.
A well-defined and managed product
category is pivotal to enhance consumer
value, sales and profit at the retail level. The
task for the supply chain operation is to sup-
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The problems associated with matching
supply with consumption are exacerbated by
unsychronized planning cycles (Towill,
1992). This is an important contributing
factor to the demand distortion for smaller
volume products in the product range. The
cumulative effect on the load of supplying
factories can be severe. Even with a limited
product range, an unsynchronized delivery
schedule can result in significant variability.
Figure 6 demonstrates how variable planning
periods for individual items in the product
range of the vendor results in a variable load
on the supplying factories – the load surge
effect (Burbidge, 1994).
The high inventory and complex control
procedures associated with the situation

port the retail outlet by efficient replenish-
ment – providing the supply service required
for the items of the product range, depending
on the category and their role in the category.
The ability of the supplier to efficiently use
demand information for planning decisions is
critical. The key factors are the product range,
capacity and required delivery frequency for
the supplying factories.
For the marketer, the service and delivery
frequency for its key items is the main con-
cern. To attain the retail customers’ goal of
demand-driven continuous replenishment,
the marketing and sales organization must
itself have a continuous supply from the
factories. A sourcing lead time of six to 12
weeks is highly insufficient. However, the
biggest problem is a low delivery frequency.
described above can be avoided by synchro-
nizing supply with demand on a periodic
basis. This is done by assigning marketers
with a regular delivery slot for the range of
products with high-profile roles in the retail
echelon of each distinct market. With a regu-
lar delivery schedule, the supplier knows the
timing of demand and can adjust to small
changes as long as his production follows the
same regular schedule (Fincke and Goffard,
1993; Lehtonen et al., 1996). This synchro-
nization of supply and demand provides
continuous supply for all marketers, regard-
less of size. Provided that changes in demand
can be quickly identified, a very high level of
service can be achieved without high inven-
tory levels, in both small and large volume
markets.

Figure 6 The effect of variable planning periods for the product range in a marketing and sales organization

Marketer Supplying factory

Delivery schedule for product range
Week P1 P2 P3 P4 P5 P6 P7 P8 P9 P10 P11 P12 P13 P14 P15 P16 P17 P18 P19 P20 P21
Load
1 X
2 X X X X X X X
3 X X X X X X
4 X X X X X
5 X X X
6 X X X
7 X X X X X X X X
8 X X X X X X X
9 X X X X X X
10 X 1 4 7 10 13
11 X X X X X X X X X X X X
Week
12 X X X X X X X
13 X X X X X
14 X X X X
15 X X X X X

112
 Product range management
Jan Holmström
The key challenge lies in improving supply
service by increasing delivery frequency from
supplying factories. Only then can the mar-
keter provide high service levels to distributors
and retailers without excessive buffers. The
first step is to reduce the product range com-
plexity from the supplying factory’s viewpoint.
The second step is to reduce the transfer batch
of individual products from the marketing and
sales organization’s perspective.
Packaging is the main source of variation in
the supply chain in this case study. Every
European language has to be on the label of
the product if it is to be sold throughout
Europe. Due to marketing requirements, it
has been necessary to create several package
variants for exactly the same product. As a
result, products destined for small markets
spend most of the time waiting in production
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and transportation schedule queues.
One possible solution to this problem
would be to take more account of supply
chain considerations in product design (Lee
and Billington, 1992). A reduction in the
number of product variants from a supplying
factory’s perspective can be achieved by using
packaging solutions where label differentia-
tion is possible according to demand (i.e. by
separating packaging and labelling). The
product is first packed in unmarked cartons.
Only when the requirements from the differ-
ent markets are known is a stick-on label
attached and the product packed in wholesale
units.
An alternative solution would be to
increase the delivery frequency for products
to small markets. Frequent deliveries of a
product range can be made possible, even to a
small market, by periodically consolidating its
volumes with those of larger markets before
labelling and despatch. Labelling and delivery
of the product range can then be synchronized
to demand regardless of whether it is, say, the
German or Finnish market that the product is
sold in. This period batch control strategy of
labelling before assembling deliveries enables
a high-delivery frequency of all label-specific
packaging variants. For small markets, the
periodic despatch of product ranges is critical,
as it makes it possible to combine several
stock-keeping units into the same delivery and
reduce transportation costs.
These potential solutions imply a change in
the structure of the supply chain. A consolida-
tion of volumes before labelling and the peri-
odic despatch of product ranges would be
113
Supply Chain Management
Volume 2 · Number 3 · 1997 · 107–115
possible with a hub-and-spoke structure.
Labelling could then be conducted for daily
or weekly despatches to the different Euro-
pean marketers or directly to retail outlets.
This structure makes a continuous supply
feasible to small markets and opens up the
potential for breakthrough improvements in
supply-chain performance.
Marketer to retail chain
In the relationship between the retail chain
and the marketer, the goal is efficient high
service and good profitability. To achieve this
the sales and distribution process has to be
demand driven. The basis for demand-driven
distribution is to operate according to actual
requirements, not budgets or plans. The role
of budgets and sales planning is to direct sales
and marketing activities with the objective to
promote demand.
The practice of consignment or vendor
managed inventory (VMI) can improve infor-
mation flow and responsiveness. The benefit
is a better quality of information from the
market. By gaining direct access to the retail
chain’s stock and demand situation, a fast and
accurate feedback for better supply chain
control is achieved (Gregory, 1994). Levy
(1995) found, in a simulation study of com-
plex supply chains, that demand-related
disruptions do not decline over time, whereas
production related disruptions do. Therefore,
feedback is critical for efficiency improve-
ments.
Some local marketers in the European
supply chain in this case study have started to
directly manage inventory for key customers.
When marketers are allowed to monitor and
control inventory in the supply chain, the
information delay between consumer and
supplier is significantly reduced. The mar-
keter can monitor demand with only a short
delay, based on sales and stock reports from
the retail chains. This information provides
the basis for replenishing the different chains
according to demand.
The implementation of VMI does not need
complex technology, the key is co-operation
and a common understanding of process and
procedure (Heard, 1994). In the marketing
and sales organization, where the category
analysis was also conducted, good results have
been achieved with a very simple system. The
application developed for administering
replenishment deliveries is based on receiving
an inventory report by EDI from the retail
 Product range management
Jan Holmström
chain warehouse. The customer stock is kept
in the sales and distribution information
system as unvalued stock. The inventory
report is processed using a standard physical
inventory transaction and the replenishment
order is created according to customer specif-
ic re-order points.
By eliminating one delaying echelon in the
information flow, the demand variability for
the marketer in this particular case study was
reduced from 75 per cent to 26 per cent for
the key product in the pilot implementation.
With the full implementation, delivery and
administration costs were significantly
reduced and the savings were used to lower
the consumer price. The results from the
retail chain’s perspective have also been
encouraging, with highly improved service
levels. However, the full benefits can only be
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realized with a reliable supply from produc-
tion units and an extension of the practice to
more retail chains.
Marketer to retailer
The retail level is pivotal for the performance
of the supply chain. It is here that success or
failure for a product is determined. It is the
demand changes occurring here that the
whole supply chain should be geared up to
respond to. For the retailer, a well-balanced
category, fulfilling its role, is of primary inter-
est. For the supplier, the measure of success is
both profitability and market share for his
brands. The issue here is how to align retailer
interest in providing consumer value with the
supplier objective of category leadership and
profit. In order to control more effectively the
undesired side effects of marketing and sales
actions, a first step is to start measuring the
effects of sales/marketing actions on con-
sumer sales at the retail level wherever there is
access to point-of-sales data. Measuring stock
days per retailer can be effectively used to
assess and follow up start-up time and inven-
tory investments for new product launches.
From the retailer perspective, profitability
of a category is considered relative to other
product categories. The product range of the
marketer must be at least as profitable as that
of competitors in the same product category,
as well as other product categories. For exam-
ple, in Finland, the competition from new
categories is increasing in the grocery trade.
After joining the European union pressures to
allow the sale of wine and other alcohol in
supermarkets is building up. The introduction
114
Supply Chain Management
Volume 2 · Number 3 · 1997 · 107–115
of wine would mean that competition for shelf
space for established product categories will
increase.
To improve profitability, retailers strive to
reduce costs. With smoother demand, suppli-
ers can themselves reduce supply chain costs
and transfer this to the trade without cutting
margins. A permanent low price and a reduc-
tion in wholesale unit package size to enable
fast turnover, even in smaller shops, would
make possible a fast flow throughout the
supply chain. Here, a potential benefit for
both retailers and marketers is a positive cash
flow.
Conclusions
The key business decision for a supplier oper-
ating in the European market is whether to
provide good service for customers in all
regional markets or not. If the decision is to
operate throughout Europe, then supply
service levels can no longer be based on sales
volume. Instead, supply service must be
provided according to the role of individual
products in specific markets.
Product range management has been
overlooked as a way of achieving efficient
supply chain management. The importance
of product range management is pronounced
in Europe, where language and regional
differences necessitate product variety in the
packaged goods business.
In destination and routine categories,
retailers require continuous replenishment
according to consumption. To achieve this,
the marketer must acquire the ability to
respond quickly and efficiently across the full
product range in these categories. In the
supply chain in this case study, one tactic
successfully used to improve responsiveness
was separating packaging from labelling.
An extended local supply chain with a
complex “many-to-many” supply chain struc-
ture, cannot achieve good service efficiently.
There is a need for alternative structures. The
findings from this case study suggest that the
hub-and-spoke supply chain structure is a
viable alternative.
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